OR-271118_watermark

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Obuv Rossii – Mixed 3Q18 results

Robust profitability but soft FCF

Obuv Rossii (OR) reported robust 3Q profitability, although this has not led to improved FCF dynamics. In the medium term, we remain positive on OR shares given the company’s high growth potential, significant scope to unlock value via working capital optimisation, and relatively inexpensive valuation, on our numbers. That said, the near-term outlook remains challenging given the still-tough consumer environment. Maintain BUY and RUB130 TP.

3Q results published

Results review

BUY (maintained)

TP: RUB130 (maintained)

Consumer Goods & Retail

Russia

Kirill Panarin

[phone] x4009 [e-mail]

David Ferguson [phone]

[e-mail]

Report date:	27 November 2018
Current price, RUB	69.5
Upside/downside, %	87.1
MktCap, $mn	118
Average daily volume, $mn	0.02
Free float, %	39
Bloomberg	OBUV RM

Summary valuation and financials, RUBmn (unless otherwise stated)

Having previously published 3Q sales up 8%, today (27 November) OR reported 3Q gross profit up 28% YoY to RUB1.82bn, EBITDA up 26% to RUB929mn (27.9% margin) and net income up 58% to RUB508mn. OR confirmed its FY guidance of 150 new stores.

Key points

▪Overall revenue growth decelerated significantly to 8% in 3Q from 23% in 2Q. Retail revenue was down 2.9% (2Q: +3%) to RUB1.62bn driven by LfL deterioration to -8.8% (traffic -8.8%, ticket +0.0%) from +1.5% in 2Q. According to OR, soft dynamics were a result of: 1) a weak consumer environment; and 2) no response to the large sell-offs of summer collections by competitors.

▪Wholesale revenue continued to demonstrate strong growth (29% YoY) supported by a franchise store base expansion last year, and reached 40% of the total in 3Q18 (1H: 29%). Cash loans revenue fell by 2.9% in 3Q (vs -3.5% in 2Q).

▪Gross margin grew by 8.7ppts YoY in 3Q to 54.6% (vs a 1.1-ppt decline in 1H) despite a higher share of wholesale revenue in the mix. Strong gross margin dynamics was a result of no response to large sell-offs by competitors, while it was also helped by a higher share of related products (36.1% / +1.8 ppts YoY). 9Q gross margin was up 3.1 ppts YoY, ahead of our FY18 forecast.

▪SG&A growth (ex D&A) remained high at 31% YoY driven by new store openings, with DOS selling space up 34% YoY (2Q: 28%). Cost of risk was down 2.8 ppts YoY on instalments and 0.1 ppt on cash loans, to 3.8% and 3.8%, respectively. This compares to our full-year forecasts of 4.2% and 3.6%.

▪EBITDA margin grew 4.0 ppts YoY to 27.9% in 3Q. This is a material improvement vs the 1H trend, with 9M18 profitability down 1.6 ppts YoY; thus, our FY forecast of a 2.7-ppt margin deterioration looks relatively conservative, although a lot will depend on 4Q trading and the competitive environment.

▪Net debt increased to RUB8.5bn (vs RUB6.3bn in 2Q and RUB5.6bn in 1Q), with net debt / EBITDA at 3.1x currently. We believe negative FCF has been driven by working capital trends resulting from fast expansion and limited inventory optimisation which is difficult to achieve in the absence of solid sales growth.

OR’s 3Q profitability was robust, driven by relatively healthy mark-ups; however, it was previously flagged by management. A more important issue, in our view, is OR’s ability to turn around its LfL dynamics, which to a large extent depends on consumer environment trends, and we see little to suggest a material improvement in this regard in the short term. In the medium term, we remain positive on OR shares given its high growth potential and significant scope to unlock value via working capital optimisation. OR currently trades on 2019 EV/EBITDA and PE of 3.8x and 5.2x, equivalent to c. 36% / 43% discounts to Detsky Mir (BUY, TP RUB117, CP RUB90).

	2017	2018E	2019E	2020E
Revenue	10,801	11,689	14,196	17,625
Gross profit	5,853	6,477	7,794	9,696
EBITDA	2,723	2,629	2,959	3,760
Net income	1,296	1,318	1,511	2,113
Net debt	4,732	5,256	3,526	3,940
FCF	-3,096	-262	1,994	-112
Net trade working capital	13,122	14,334	13,581	15,653
Net debt/EBITDA	1.7	2.0	1.2	1.0
Revenue growth, %	8.4	8.2	21.4	24.2
Gross margin, %	54.2	55.4	54.9	55.0
EBITDA margin, %	25.2	22.5	20.8	21.3
Net margin, %	12.0	11.3	10.6	12.0
Net income growth, %	9.6	1.7	14.7	39.8
RoIC, %	14.8	10.5	11.1	13.6
EV/revenue, x	1.2	1.1	0.8	0.7
EV/EBITDA, x	4.6	5.0	3.8	3.1
P/E, x	6.1	6.0	5.2	3.7

Current intraday prices shown at 27 November 2018

Source: Company data, Renaissance Capital estimates

Figure 1: Price performance – 52 weeks, RUB

OBUV RM

160

140

120

100

80

60

40

Jan-18

Feb-18

Mar-18

Apr-18

May-18

Jun-18

Jul-18

Aug-18

Sep-18

Oct-18

Nov-17

Dec-17

Nov-18

Source: Bloomberg

© 2018 Renaissance Securities (Cyprus) Limited. All rights reserved. Regulated by the Cyprus Securities and Exchange Commission (Licence No: KEPEY 053/04). Hyperlinks to important information accessible at www.rencap.com: Disclosures and Privacy Policy, Terms & Conditions, Disclaimer.

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		Renaissance Capital
		27 November 2018
		Obuv Rossii
Figure 2: OR’s LfL sales growth decreased to -8.8% in 3Q18…	Figure 3: …although revenue growth is still likely to accelerate in the medium
	term, helped by an expansion acceleration

	LfL sales growth, %		LfL traffic growth, %		LfL ticket growth, %

15.0%

10.0%

5.0%

0.0%

-5.0%

-10.0%

-15.0%

-20.0%

4Q16

1Q17

2Q17

3Q17

4Q17

1Q18

2Q18

3Q18

		Revenue, RUBbn			Growth, %
20.0						30.0%
18.0
16.0						25.0%
14.0						20.0%
12.0
10.0						15.0%
8.0
6.0						10.0%
4.0						5.0%
2.0
0.0						0.0%
2014	2015	2016	2017	2018E	2019E	2020E

Source: Company data Source: Company data, Renaissance Capital estimates

Figure 4: We forecast an 11.4% EBITDA CAGR in 2017-2020… Figure 5: …and a respective net income CAGR of 17.7%

EBITDA, RUBmn

EBITDA margin, %

4,000				30.0%	2,500
3,500				25.0%
3,000					2,000
2,500				20.0%
					1,500
2,000				15.0%
1,500					1,000
				10.0%
1,000					500
				5.0%
500
0				0.0%	0
2016	2017	2018E	2019E	2020E

	Net income, RUBmn		Growth, %
				45%
				40%
				35%
				30%
				25%
				20%
				15%
				10%
				5%
				0%
2016	2017	2018E	2019E	2020E

Source: Company data, Renaissance Capital estimates

Source: Company data, Renaissance Capital estimates

Figure 6: Per-capita footwear consumption in Russia declined during the economic crisis and we expect a gradual volume recovery…

Figure 7: …which, combined with inflation, should lead to high-single-digit market CAGR between 2017 and 2022

Per capita consumption, pairs of shoes

4.0										1.80
3.5										1.60
3.0			-49%							1.40
2.5						+3.7% CAGR				1.20
										1.00
2.0										0.80
1.5										0.60
1.0										0.40
0.5										0.20
0.0										0.00
2012	2013	2014	2015	2016	2017	2018E	2019E	2020E	2021E	2022E

		Russian footwear market, RUBtn							Growth, %
										12.0%
										10.0%
										8.0%
										6.0%
										4.0%
										2.0%
2012	2013	2014	2015	2016	2017					0.0%
						2018E	2019E	2020E	2021E	2022E

Note: Renaissance Capital forecasts are shown.	Note: Renaissance Capital forecasts are shown.
Source: Discovery Research Group, Renaissance Capital estimates	Source: Discovery Research Group, Renaissance Capital estimates

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												Renaissance Capital
												27 November 2018
												Obuv Rossii
Figure 8: We see scope for the mid-price segment to take share in an improving										Figure 9: Shoe retail in Russia is highly fragmented and could consolidate
economy
100%			Low-price		Mid-price			High-price		50%	Share of top 10 footwear retailers (2017), %
90%										45%
80%										40%
70%										35%
60%										30%
50%										25%
40%										20%
30%										15%
20%										10%
10%										5%
0%										0%
2008 2009 2010 2011					2012 2013			2014 2015 2016 2017		Germany USA France Japan China Turkey Canada India Russia
								Source: Discovery Research Group				Source: Euromonitor

Figure 10: A multi-brand strategy allows OR to reach a wide target audience

Description

Target age

Household income

Average selling space

SKU count

Catchment area

Price range

Blended mark-up

Annual sales per m2

Share of sales

Fashionable Italian

Fashionable

Affordable

Traditional

Modern footwear for

footwear of classic

style footwear for

footwear for

footwear

the entire family

French style for

young women

everyone

young audience

30-50

25+ / children

25-35

20-30

20-60

RUB 25-50k

RUB 25-50k

RUB 25-50k

RUB 25-50k

RUB 15-30k

84 m2

126 m2

78 m2

60 m2

204 m2

3,000

2,400

1,100

1,000

4,800

80,000 people

150,000 people

80,000 people

80,000 people

150,000 people

High

RUB 7.5k

High

RUB 7.5k

High

RUB 7.5k

High

RUB 7.5k

High

RUB 7.5k

Mid

Mid

Mid

Mid

Mid

RUB 3k

RUB 3k

RUB 3k

RUB 3k

RUB 3k

Low

Low

Low

Low

Low

110%

100%

110-115%

105%

60-75%

c. 300k RUB

c. 220k RUB

c. 230k RUB

c. 285k RUB

c. 130k RUB

65%

6.8%

1.6%

1.1%

12%

Source: Company data

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		Renaissance Capital
		27 November 2018
		Obuv Rossii
Figure 11: Share of related products in OR’s sales has grown significantly…	Figure 12: …which has been supportive for LfL growth and profitability given
	adjacent categories’ higher sales densities and mark-ups

Related products revenue, RUBbn				Share in retail revenue, %		2000
4.0					35%
						1800
3.5					30%	1600
3.0					25%	1400
2.5						1200
					20%
2.0						1000
						800
					15%
1.5
						600
1.0					10%	400
0.5					5%	200
						0
0.0					0%
2012	2013	2014	2015	2016	2017
					Source: Company data

			Sales per m2, '000s RUB			Trade mark-up range, %		250%
							220%
								200%
								150%
					135%
	105%			115%	120%		140%	100%
	90%			95%
	170			454	268		257	50%
								0%
	Footwear			Apparel	Bags		Other related
							products

Source: Company data

	Figure 13: Opening 100+ stores per year is possible but requires strong execution
	600			Stores added between Sep-13 and Dec-16				Anuualised store additions
		480
	500
	400
	300
			>200		199	184
	200	160
			>67		66	61			86	69
	100
									29
										23
	0
		Kari		Zenden	Obuv Rossii	Chester			Unichel	Belwest

Note: Includes store openings in CIS.

Source: Company data, Discovery Research Group, Renaissance Capital

Figure 14: We see significant scope for expansion in the Central, North-West and Volga regions

				Far East region
				TNorth-
				West
				region
Central				Siberian region
region				Urals
	Volga			region
	region
Southern
region

Source: Company data

4

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Renaissance Capital

27 November 2018

Obuv Rossii

Figure 15: Cash loan revenue accounted for 15% of total in 2016 and with a low Figure 16: Cash loans business accounted for 30% of group EBITDA in 2017 cost of risk, comfortably exceeded loan-loss provisions

Interest income, RUBmn		Loan loss provisions, RUBmn			Segment EBITDA, RUBmn			Share of total EBITDA*, %
Cost of risk, %					Margin, %
1,600				7.0%	1,000				70%
1,400				6.0%					60%
					800
1,200
				5.0%					50%
1,000				4.0%	600				40%
800
600				3.0%	400				30%
400				2.0%					20%
					200
				1.0%					10%
200
0				0.0%	0				0%
2014	2015	2016	2017		2014	2015	2016	2017
					*Total EBITDA before unallocated SG&A costs is used.
				Source: Company data					Source: Company data
Figure 17: OR – income statement, RUBmn (unless otherwise stated)
			2014	2015	2016	2017	2018E	2019E	2020E
Revenue			7,663	9,156	9,965	10,801	11,689	14,196	17,625
Growth				19%	9%	8%	8%	21%	24%
– Retail revenue			5,874	6,844	7,663	7,078	7,652	9,976	13,245
– Growth				16.5%	12.0%	-7.6%	8.1%	30.4%	32.8%
– Wholesale revenue			987	948	825	2,224	2,493	2,603	2,715
– Growth				-4.0%	-13.0%	169.7%	12.1%	4.4%	4.3%
– Cash loans revenue			802	1,364	1,478	1,500	1,543	1,617	1,665
– Growth				70.0%	8.4%	1.5%	2.9%	4.8%	3.0%
Cost of sales			(3,676)	(3,646)	(4,106)	(4,948)	(5,212)	(6,402)	(7,928)
Gross profit			3,987	5,510	5,859	5,853	6,477	7,794	9,696
Gross margin			52.0%	60.2%	58.8%	54.2%	55.4%	54.9%	55.0%
SG&A (excl. D&A)			(2,633)	(2,963)	(3,332)	(3,350)	(3,938)	(4,966)	(6,116)
Other income and expenses			(30)	54	(6)	172	57	87	126
EBITDA			1,325	2,602	2,540	2,723	2,629	2,959	3,760
EBITDA margin			17.3%	28.4%	25.5%	25.2%	22.5%	20.8%	21.3%
D&A			(87)	(133)	(217)	(264)	(336)	(446)	(536)
EBIT			1,238	2,469	2,323	2,458	2,294	2,513	3,224
Margin			16.2%	27.0%	23.3%	22.8%	19.6%	17.7%	18.3%
Financial income			20	21	26	63	95	108	149
Financial costs			(459)	(815)	(1,019)	(1,038)	(742)	(732)	(732)
PBT			800	1,676	1,330	1,483	1,647	1,889	2,641
Tax expense			(162)	(207)	(147)	(187)	(329)	(378)	(528)
Net profit			637	1,469	1,183	1,296	1,318	1,511	2,113
Growth				130%	-19%	10%	2%	15%	40%
Margin			8.3%	16.0%	11.9%	12.0%	11.3%	10.6%	12.0%
							Source: Company data, Renaissance Capital estimates

Figure 18: OR – peer multiples, x

Company	Currency	Share	MktCap,		EV/EBITDA, x				P/E, x			EV/sales, x
		price	$mn	2017		2018E	2019E	2017	2018E	2019E	2017		2018E	2019E
Obuv Rossii	RUB	69.5	118	4.6		5.0	3.8	6.1	6.0	5.2	1.2		1.1	0.8
International peers
Truworths	ZAR	86.7	2,761	8.5		8.9	9.0	13.3	13.5	12.9	2.2		2.3	2.1
CCC	PLN	193.5	2,098	16.8	16.0		10.8	26.9	29.8	18.7	2.0	1.7		1.3
LPP	PLN	7590	3,704	15.5		12.0	10.3	31.3	23.7	20.5	1.9		1.6	1.4
Foschini	ZAR	170.9	2,913	10.0	9.3		8.5	15.5	14.4	13.7	1.6	1.4		1.4
Lojas Renner	BRL	38.0	6,928	15.5		15.8	13.5	30.2	27.9	23.6	3.1		3.2	2.8
Forus	CLP	1,866	713	9.4	11.8		10.8	16.9	17.9	16.5	1.5	1.9		1.8
Arezzo	BRL	49.8	1,140	16.9		17.5	14.6	23.5	26.3	21.8	2.6		2.7	2.3
International average				13.2	13.0		11.1	22.5	21.9	18.2	2.1	2.1		1.9
Russian small-/mid-cap retailers
Lenta	USD	3.5	1,706	5.4	5.3		4.9	7.5	8.2	8.0	0.5	0.5		0.4
M.Video	RUB	399	1,077	4.6		4.2	3.7	10.3	10.2	9.5	0.3		0.2	0.2
Detsky Mir	RUB	90.0	997	7.2	6.3		6.0	12.1	9.6	9.2	0.8	0.7		0.7
Russian small-cap average				5.7		5.3	4.8	10.0	9.3	8.9	0.5		0.5	0.4

Note: Renaissance Capital estimates used for Obuv Rossii, Detsky Mir and Lenta; Bloomberg consensus is used for others. Intraday pricing as of 27 November 2018.

Source: Bloomberg, Renaissance Capital estimates

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